In many cases, the end of the year gives you time to step back and take stock of the last 12 months. This is when many of us take a hard look at what worked and what did not, complete performance reviews, and formulate plans for the coming year. For me, it is all of those things plus a time when I u...

The evolution of DISH Network Corporation's (DISH) wireless strategy
took a step forward Tuesday, as evidenced by the company's proposal to
enter into a multifaceted, complicated series of agreements with
Clearwire Corporation. In accordance with the terms of DISH's proposal,
DISH would acquire, among other things, approximately 24% of Clearwire's
wireless spectrum for $2.2 billion. Fitch Ratings believes the proposed
transaction is a positive development for DISH, but could also pressure
its current ratings.

If the bid for Clearwire is successful, DISH would secure a potential
partner to build and deploy a wireless network. DISH had previously
signaled its preference to participate in a network
infrastructure-sharing arrangement to enter into the wireless market as
opposed to deploying a greenfield wireless network. However, recent
consolidation, investments, and spectrum acquisitions within the
wireless sector have reduced the number of potential entities DISH can
partner with to deploy its wireless network creating an urgency to
establish a partnership with Clearwire. DISH's proposal leverages
Clearwire's expertise and existing assets to construct, operate, and
manage a wireless network utilizing DISH's AWS-4 spectrum and the 2.5
GHz spectrum acquired through the proposed transaction.

The wireless spectrum enables DISH to diversify its business and add
mobility to its fixed video service model while positioning the company
to capture incremental revenue and cash flow growth. DISH believes the
competitive forces within the mature video-programming distribution
market may diminish the value of the company's existing direct-broadcast
satellite infrastructure. Most notable among these competitive forces
are the emergence of cloud-based services and the migration to Internet
protocol-based video content delivery.

A proposed alliance with DISH and Clearwire would clearly be a negative
for Sprint, absent any considerations on whether or not the DISH offer
is valid. A successful alliance would mean Sprint would no longer have
sole control of strategic direction of Clearwire assets, and competing
interests for how Clearwire's network is deployed would ensue. DISH
proposes to acquire at least 25% of Clearwire's outstanding common
stock, which along with the governance provisions outlined in DISH's
proposal, sets the foundation for DISH to influence Clearwire's
strategic direction. The DISH Clearwire alliance would also impact the
long-term strategic plans of Sprint/Softbank to differentiate its
broadband offering by virtue of the "fattest wireless pipe" potentially
in the industry to provide the bandwidth required for Sprint's unlimited
plans.

DISH's purchase of approximately one-quarter of Clearwire's total
spectrum position, likely representing a significant portion of
Clearwire's more valuable wholly owned BRS spectrum, would also be
negative for Sprint, as they would lose control of a valuable long-term
asset. About 60% of Clearwire's spectrum is leased while 40% is owned.

A DISH/Clearwire alliance would also enable a new competitor access to
deep spectrum resources that would be considered a negative longer-term
for Sprint revenue, cash flow, and profitability. Considering Sprint's
position as the third largest operator, this would weigh materially more
on Sprint versus Verizon or AT&T.

We believe the incremental capital and operating costs related to DISH's
potential wireless network build out will diminish the company's ability
to generate free cash flow and erode operating margins, potentially
resulting in a weaker credit profile. We believe business risk inherent
in launching a wireless business limits the flexibility DISH has to
increase leverage at the current rating level to accommodate the
incremental capital costs and EBITDA erosion associated with the build
out of a wireless network.

The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.

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